July 19, 2019 / 1:57 PM / a month ago

TREASURIES-Yields rise as size of expected Fed rate cut in focus

    * Fed's Williams increased expectations of 50 bp rate cut
    * Fed's Clarida said Fed may need to act early with stimulus

    By Karen Brettell
    NEW YORK, July 19 (Reuters) - U.S. Treasury yields rose on
Friday as investors evaluated comments from two influential
Federal Reserve officials on Thursday, which increased
expectations that the U.S. central bank may cut its benchmark
interest rate by more than previously expected when it meets
this month.
    John Williams, vice chairman of the Fed's rate-setting
committee and head of the regional Fed bank in New York, said
when rates and inflation are low, policymakers cannot afford to
keep their "powder dry" and wait for potential economic problems
to materialize.             
    With a rate cut at the U.S. central bank’s meeting on July
30-31 seen as certain, traders saw a 50-basis-point cut as more
likely than a 25-basis-point one in the aftermath of Williams'
    “The question is, with the timing of it so close to the
beginning of the blackout period, was he trying to express what
his argument will be going into the meeting?” said Lou Brien, a
market strategist at DRW Trading in Chicago.
     Fed officials are unable to speak publically for a set
period before each Fed meeting.
    The odds of a 50-basis-point cut fell after the New York Fed
said later on Thursday that Williams' speech was not about
potential actions at this month’s meeting.             
    “Even though the New York Fed overnight said this is
academic, don’t take this as any kind of near-term signal, the
market gave back a little bit of that expectation but not all of
it,” Brien said. The question is now, “whether he thinks
aggressive is just going 25 (bps) when the data is such that you
have a low unemployment rate and reasonable GDP etc, or if
aggressive to him means 50 (bps), which is what the market was
kind of pricing in.”
    Interest rate futures traders on Friday are pricing for a 59
percent chance of a 25-basis-point cut and a 41 percent
probability of a 50 basis-point-rate decrease, according to the
CME Group’s FedWatch tool.
    Fed Board of Governors Vice Chair Richard Clarida also said
on Thursday that policymakers might need to act early to
stimulate the U.S. economy as an insurance policy against rising
    In recent weeks, Fed policymakers have identified a host of
economic concerns, including the prolonged U.S.-China trade war,
which is denting business confidence; a global manufacturing
slowdown; and inflation below the Fed's target of 2% a year.

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